IRS Releases Small Group Tax Credit Examples

The Internal Revenue Service has come out with guidelines for small commercial and nonprofit employers that want to take advantage of a new health insurance tax break.

The small employer health insurance tax credit guidelines, given in IRS Notice 2010-44, include examples that can help employers and their benefits advisors determine whether the employers are eligible for the tax break, and exactly how much of the new federal health insurance tax credit the employers can claim.

Calculating exactly how small an employer is for tax credit purposes will depend partly on the definition of “full-time equivalent” employee, officials write in the notice.

“In general, employees who perform services for the employer during the taxable year are taken into account in determining the employer’s FTEs, average wages, and premiums paid,” officials write.

But “partners in a business and certain owners are not taken into account as employees,” officials write. “Specifically, sole proprietors, partners in a partnership, shareholders owning more than 2% of an S corporation.

Owners and partners need not count family members or other dependents who are members of their households as employees when they are trying to qualify for the tax credit.

IRS officials devote another section to computing workers’ hours.

The IRS issued the notice to implement a new tax law, Section 45R of the Internal Revenue Code, which was added by Section 1421 of the new Patient Protection and Affordable Care Act.

PPACA and a companion act, the Health Care and Education Reconciliation Act, are part of what federal agencies have dubbed the Affordable Care Act.

This year, the new ACA small business tax break will offer small employers a tax credit equal to at least half the cost of single coverage, if the employees earn average wages of less than $50,000 per year.

The tax credit is not available to ordinary government employers, but it is available to small businesses, small tax-exempt employers, and government-affiliated tax-exempt employers that can be described as section 501(c) organizations.

“For tax years 2010 to 2013, the maximum credit is 35% of premiums paid by eligible small business employers and 25% of premiums paid by eligible employers that are tax-exempt organizations,” officials write in a summary of the notice.

Employers with 10 or fewer FTE employees that pay annual average wages of $25,000 or less can qualify for the maximum credit.

Employers with 10 to 25 FTE employees that pay annual wages of $50,000 or less can qualify for a smaller tax credit.